A drought that’s ravaging US crops is prompting agricultural commodities traders to seek protection in a new and booming corner of the options market.
With prices moving sharply depending on the weather, traders are piling into short-term options to hedge every little bit of rain or dry forecast ahead. These products, which expire weekly or in different months than traditional contracts, accounted for a record 22% of all options transacted in June, according to CME Group Inc.
US crops are in the worst condition since 1988, and there are concerns the dry weather will curb output in the world’s top corn grower and second-largest soybean producer. Traders are also seeking protection before the US Department of Agriculture’s acreage and grains stocks report, which could shine a light on the size of the crop and buffer supplies.
The markets have been very busy the past two weeks and price moves have been violent, said Patrick Quaid, senior vice-president for agriculture options at R.J. O’Brien in Chicago. “Options are the best way to hedge your exposure given the cost compared to futures during periods of high volatility like we are seeing now,” he said.
Short-term options have become wildly popular as the war in Ukraine, soaring inflation and rising rates prompted investors seek protection and trade every market move. While these instruments are fairly new in agriculture, they have already taken off in markets like the S&P 500. Options that track the index and expire in seven days or less reached record volumes in 2022. They grew even more this year, according to exchange operator Cboe Global Markets Inc.
Drought is currently affecting approximately 64% of corn production and 57% of soybean production. Prices for both commodities have surged more than 10% this month.
Corn options trading was the second highest on record on June 16, and a short-term contract that allows traders to bet on the next crop also had record volume on the same day, with 147,916 contracts traded. Average daily volume for the entire agricultural options complex also hit an all-time high on the same date.
--With assistance from Gerson Freitas Jr..